What does the agreement between the United States and China to reduce their greenhouse gas emissions mean to 'Joe Industry'?

All media outlets are discussing a groundbreaking agreement between the United States and China to reduce their greenhouse gas (GHG) emissions. Under the agreement, the United States promised to cut net greenhouse gas emissions by 26 percent to 28 percent below 2005 levels by 2025, and China said it would aim to reach a peak of carbon dioxide emissions around 2030. Certainly given the complex history of international climate change negotiation over the past two decades, it is historic to have more than one-third of the world's GHG emitters1 come to an agreement of any kind. And it does give momentum and some leverage to the United States in the global climate change negotiations, in advance of a United Nations conference in Paris next year, which is supposed to achieve a legally binding and universal agreement. But is this agreement as significant as the hype?

There are three things to keep in mind:

First, from the United States’ perspective, the U.S.–China agreement is an executive agreement that is politically binding but not legally binding.

Second, to become a legally binding treaty in the United States, the executive agreement would need to be ratified by a two-thirds majority of the Senate. Given the Senate’s failure to ratify most environmental agreements over the past few decades, as well as the upcoming Republican majority in the Senate, ratification of the U.S./China agreement is unlikely.

Third, the cornerstone of the Obama administration’s currently proposed plan to reduce GHG from the electricity sector (the Clean Power Plan) is subject to significant challenge and is likely in legal jeopardy, at least on some fronts. So if existing plans are fraught with challenge, this is a fair bellwether for the fate of additional proposals.

And while we can admire the significance of this development on the global climate change negotiations stage, it begs analysis of what this means for U.S. domestic industry. Where, then, do the GHG reductions come from to cut U.S. net greenhouse gas emissions by 26 percent to 28 percent below 2005 levels by 2025? This is a fair question, and is where “Joe Industry” needs to be concerned. In fact, the Obama administration is silent on that point. The White House will only say, “[t]his ambitious target is grounded in intensive analysis of cost-effective carbon pollution reductions achievable under existing law and will keep the United States on the right trajectory to achieve deep economy-wide reductions on the order of 80 percent by 2050.”2

In 2009, President Obama set an ambitious goal to cut emissions to 17 percent below 2005 levels in 2020. Despite this “goal” never being ratified by Congress,3 it has been the driver of policy change as the administration took actions to cut carbon pollution, including investing more than $80 billion in clean energy technologies under the recovery program, establishing historic fuel economy standards, and proposing the Clean Power Plan.4 These measures since 2009 stretch the limit of existing executive branch authority and, despite the administration's claim that additional reductions can be met “under existing law,” the executive branch, to achieve larger GHG reductions, will likely require additional authority granted by Congress. While there are multiple variations of where this authority can come from, some likely scenarios include : (1) “command-and-control” regulations that are generally dependent upon advancements in technology – which may or may not yet exist, but which are almost always more expensive than the status quo; (2) tax (dis)incentives (e.g., accelerated deductions for new and more environmentally friendly technology controls); and (3) financial mechanisms such as “cap and trade” programs like the RGGI program in the Northeast, and California’s “AB32” program. It is also clear that further greenhouse gas reductions, deeper than the 2009 goals, will have to come from – and likely require further regulation in – additional sectors outside of electricity production.

Now may be the most prudent time for industry to explore with the administration from where these extra reductions agreed to with China will come.

This proves an executive branch “agreement,” like the recent agreement with China, can still shape regulation despite lack of Congressional ratification. However, the administration could take unilateral (i.e., without Congressional support) steps toward the 2009 goal only because the administration used existing Congressional authority. As discussed infra, that is likely not the case with the recent agreement with China.